The Minnesota Senate on Tuesday passed a plan that would expand a state tax exemption for Social Security benefits without eliminating the tax after maneuvering around a version of repeal that fell short.
The item is just one part of the expanded tax package, which would also include one-off rebates, boost child and dependent tax credits, send more money to local governments and ramp up property tax relief programs. The bill also includes an increase in taxes for companies with foreign subsidiaries that they sometimes use to reduce their tax liability.
The final vote was 34-33 along party lines, with the majority of Democrats voting in favor.
Much of the debate centered on the tax treatment of Social Security benefits, as this was a powerful campaign theme.
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The bill would avoid state taxes on Social Security income for couples earning $100,000 or less and singles under $78,000 — more than current law allows and at a level that would cover about three-quarters of those on benefits.
Senator Aric Putnam, DFL-St. Cloud, pointed out that it’s not a cliff above that level, meaning it would also lower the tax burden for people who earn more than the tax-free level. The tax cuts are phased out after a couple earns $140,000 in total income on Social Security.
“This is the largest tax cut for retirees receiving Social Security benefits in Minnesota history,” he said.
Senator Carla Nelson, who served as tax chair when Republicans ran the Senate last year, said the result falls short of what it should be.
“One hundred percent of Minnesota residents should be 100 percent exempt from Social Security income tax,” said Nelson of Rochester.
The Senate considered amendments that would link the complete repeal of the Social Security tax to increases in other taxes on annual income from investments, estates and trusts above $250,000 per year.
The amendment ultimately failed after hours of debate. But DFLers who campaigned for the tax to be abolished could still vote for repeal.
Republicans accused the majority of using the procedural tactics purely for political cover. They said Minnesota’s projected budget surplus of $17.5 billion should provide enough money to get the job done.
“We gave this agency ample opportunity to pass a clean and clear Social Security tax exemption because that is what the people wanted. And that’s what they told us last year when we all went door to door,” said Senator Andrew Mathews, R-Milaca. “But when the fog gets thick in the Capitol and you start to lose your sanity and you start to get drowsy from the heaviness of what all these special interests are saying, they start running at you.”
DFLers said Minnesota voters also favor new investments in education, health care, transportation and other areas. Those expenses combined have gobbled up much of the money available in the proposed two-year budget under consideration.
A complete elimination of the tax would drain at least $1.2 billion from the state coffers every two years, with the amount increasing as the number of retirees increases. The partial tax reduction makes a significant difference in the cost price.
“Everyone has been pushing for the abolition of the Social Security tax. We also offer retirement income elimination,” said DFL-Plymouth Senator Bonnie Westlin. “But you have to pay for it.”
The Social Security parameters in the bill are similar to legislation passed last week by the Minnesota House.
As for the discounts, the bill would allow one-time payments of $558 for couples and $279 for single filers, with $56 for up to three dependents. The reductions are smaller than what Governor Tim Walz has proposed and would be subject to income limits, capped at joint applicants earning $150,000 or less and singles earning $75,000 or less.
DFL-New Hope Senate Income Tax Chair Ann Rest hailed it as a nearly $1.1 billion refund for low- and middle-income families.
Senator Bill Weber, R-Luverne, said there should be no cap.
“We’re not on board with resource testing,” he said. “We think everyone should get that discount because everyone contributed to the surplus, either through sales and sales taxes or income and income taxes.”
This provision is also closely in line with a bill that has already been passed in the House.
The Senate has passed a Republican amendment by Senator Julia Coleman that would exempt a range of baby products from sales tax, everything from cribs to car seats to infant eating utensils.
A final tax agreement is expected in mid-May.
